This story originally appeared in Convoy’s “The Future of Freight,” featuring 40 thoughtfully curated pages on supply chain disruption, freight procurement, market volatility, and more. Read the full issue.
Clinging to traditional patterns and practices of contract freight has become an increasingly large liability in the world of volatile supply chains. So what can we do about it? Our customers are leaning into new approaches starting with their most problematic freight. You can too.
The fundamental flaw of traditional freight contracts
The RFP is a cornerstone of the freight procurement process. For high-volume shippers, it provides a foundation for annual budgeting. Its resulting contracts are meant to provide transportation teams with reliable, quality capacity, budget predictability, and operational savings.
At the same time, the RFP process takes months to complete and costs millions in operational expenses each year. Even after contracts are signed, they quickly break down. In tight markets, tender rejection forces transportation teams into their routing guides, where they spend thousands of hours manually sourcing capacity at higher rates. In soft markets, shippers renege on volume commitments, spending operational hours to find cheaper rates on the spot market, at the risk of working with unfamiliar, lower-quality carriers.
Regardless of market conditions, the RFP creates a zero-sum game that pits shippers against brokers and carriers, establishing a relationship founded on mistrust. Within six months, much of the effort that went into the RFP is moot, with half of all negotiated contract rates or tender acceptance levels no longer being honored.
The pandemic has further highlighted the fundamental flaw of traditional freight contracts — they attempt to assert control and predictability over an unpredictable freight market. And because of this, they invariably fail to deliver on their promises.
The broken promise of reliable, quality capacity
Without RFPs and contracts, every shipment would be subject to the spot market. There’d be no guarantee of coverage, and transportation teams would work with many carriers who aren’t experienced in hauling their freight.
RFPs hold the promise of providing reliable capacity, binding carriers to a shipper throughout the contract term and improving service quality through greater carrier consistency. Yet in tight markets, this promise is quickly broken. When contract rates expose carriers to sufficient financial risk, they reject tenders and gravitate toward the more profitable spot market. As a result, shippers fall back into their routing guide or spot, where they’re more likely to work with unfamiliar carriers, receive lower-quality service, and face higher risk of service failure.
An analysis of data from FTR, DAT, and FreightWaves shows a strong correlation between tender rejections and the difference between contract and spot rates. As spot rates climb further and further away from contract rates, tender rejections increase in tandem.
A look at 2019 data from one Convoy shipper shows that even in soft markets, spot surges can immediately follow RFP agreements and drive up costs as carriers fail to meet volume or rate commitments.
A new approach to sourcing primary freight
In 2019, Convoy began to pilot a program called Guaranteed Primary. It set out to deliver on the key promises of the RFP without the overhead of running a months-long procurement event. The program officially launched in September 2020 and allowed our customers to participate in a dynamically priced contract agreement that guaranteed tender acceptance.
How Guaranteed Primary works
1. No RFP overhead
When a shipper uses Guaranteed Primary for any particular lane, they completely eliminate the need for an RFP. Instead, the shipper agrees to allocate all volume on the lane to Convoy.
2. A low fixed margin rate
In contrast to traditional contracts that set a fixed rate per mile, Guaranteed Primary establishes a fixed margin over the course of the contract — this margin can be up to 50% lower than the industry average of 15% to 18%. On each load, shippers pay a dynamic rate generated by Convoy’s predictive pricing algorithm. The rate is visible prior to tendering, which delivers pricing transparency upfront and removes the need for budget reconciliation.
3. 100% tender acceptance
As the shipper tenders loads to Convoy, we guarantee acceptance by tapping our nationwide network of more than 400,000 trucks. And through the use of an automated bidding system, carriers compete to haul loads, ensuring that our customers always get capacity at competitive rates.
4. Unparalleled transparency
Throughout the process, Convoy provides pricing transparency, sharing our truck costs for every shipment. Each month, customers receive an insights report detailing the estimated savings they’ve received comparing their actual costs to what they would have spent using an RFP or the spot market.
5. Shippers can cancel at any time
If a customer is unsatisfied with the program for any reason, they can cancel at any time.
Isn’t this just a cost-plus program?
At first glance, Guaranteed Primary looks a lot like a traditional cost-plus program. Although both programs make use of a fixed margin, there is an important difference. Cost-plus programs are backward looking, whereas Guaranteed Primary is a predictive (future-looking) program.
With cost-plus, transportation teams don’t have access to accurate carrier costs at the time of tendering. Instead, shippers just receive an invoice after delivery. This leads to operational headaches and unexpected costs because shippers are expected to reconcile the actual carrier costs for every shipment.
By contrast, Guaranteed Primary is based on Convoy’s predictive pricing models. When transportation teams tender their freight (e.g., daily, weekly), Convoy generates a rate that predicts our costs to source the truck. Our pricing is based on machine learning models that get smarter with every shipment. And we take on the liability of our predictive rates being accurate. When our rate predictions are off, we shoulder the financial burden, eliminating the need for any billing reconciliation.
Start with your most volatile freight
Customers have tested Guaranteed Primary across a wide range of scenarios, including with their most problematic freight. I’m proud to share that at the time this article was written, every customer we’ve onboarded to the program is still using it today.
When the industry tender rejection rate was hovering around 25% in Q3 2021, Convoy accepted 99.997% of Guaranteed Primary loads.
This is strong evidence that our network is resilient and reliable even during periods of extreme volatility.
While we’re still in the early days of this monumental shift away from the win/lose dynamic of traditional RFPs, the easiest place to start evolving your contract strategy is with your most volatile freight. Instead of lumping your “problem” freight into your RFP, consider carving it out as part of an intentional move into a program like Guaranteed Primary. Here are some of the top qualifiers you can look for within your freight portfolio based on what’s been working for our customers.
1. Stockout avoidance (or anywhere you really need to guarantee service)
One of our large retail customers was struggling to keep products in stock with a typical tender acceptance of just 15% on surge freight. When they began using Guaranteed Primary, tender acceptance shot up to 100%, allowing them to realize millions of dollars in revenue by keeping shelves stocked.
2. Just-in-time manufacturing or inventory management
Some of our customers don’t have the luxury of advanced planning. Despite having an average lead time of only 24 business hours, we eliminated the need for spot and serviced more than 350 problematic lanes for a multinational auto manufacturer. They were previously experiencing rejection rates of up to 30%. But with our elastic carrier network, we have covered 100% of loads while meeting the strict OTP and OTD requirements inherent with the coordinated relays of just-in-time manufacturing.
3. Low-volume lanes or low-lead-time freight
Low-volume and low-lead-time freight typically experiences high tender rejection rates and relies more heavily on the spot market. Our customers are putting this freight into Guaranteed Primary to reduce costs while improving service. One customer’s analysis demonstrated a 16% savings on truck costs for the lanes they moved to Guaranteed Primary, and an estimated $90,000 savings on administrative costs by avoiding the spot market.
Overall, we’re seeing positive shifts in the market, indicating a collective effort to modernize contract freight. Mini-bids are more common. Technology is making traditional RFP processes less cumbersome and manual. And other freight companies are evolving their existing cost-plus programs to more closely mirror Guaranteed Primary.
Now’s the ideal time to start running your volatile freight through a dynamic pricing program. Guaranteed Primary customers will benefit from even more cost savings by riding rates down in soft market conditions. Beyond these financial benefits, our customers tell us that the improvement to service quality alone is enough reason to make the switch. Regardless of market conditions, dynamic pricing programs like Guaranteed Primary are well positioned to take substantial volume from spot and traditional contract markets in the future by creating more balanced freight portfolios that benefit both shippers and carriers.